Enter information about your planned rate of return

Updated: 04/19/2016 |
Article ID: HOW23761

1. Indicate whether you want to use separate rates of return for taxable and tax-deferred accounts (Tax-deferred savings are investments that postpone (but don't eliminate) taxes on earnings and sometimes contributions. Unlike taxable savings, the taxes on the interest, dividends, and any associated capital gains are postponed until you dip into the savings. You usually have restrictions on how much you can save, and you can't dip into the savings until you are 59 1/2 years old (or else you face significant taxes and tax penalties)).

2. Enter the average rate of return that you and your spouse expect to achieve before and after retirement; if you are using separate rates of return for taxable and tax-deferred accounts, enter different rates for the different types of accounts.

3. Enter a percentage amount of your gains that will be taxable each year.

Before-retirement return is the percent gain you expect to receive on your current investments and future savings between now and retirement. Tax-deferred investments gains are reinvested each year without being taxed, until you withdraw them. Taxable investment gains are taxed before being reinvested. To make your plan work, the annual return you select must permit your investments to grow enough to fund your retirement years.

After-retirement return is the percent gain you expect to receive on your investments after your retire. To make your plan work, the annual return you select must permit your investments to grow enough to fund your retirement years.

Choosing the appropriate rate of return depends on:

Your retirement objectives, and the rate of return you will need in order to provide enough income in retirement.

Your tolerance for risk. Only you can determine how you feel about investment risk.

Your financial plan helps you determine the rate of return you need to cover your retirement expenses. The higher it is, the more risk you will need to take in your investments.

If you can ignore the daily ups and downs of the market and focus on the long-term, you might consider investing in higher risk assets. However, once you reach retirement age, you need a more stable income from your investments. Greater stability usually means lower risk, so you might consider choosing a lower potential return rate for your after-retirement rate than for your before-retirement rate.

This information is used to help you estimate how much your investments may be worth at retirement and to determine if they are sufficient to meet your retirement needs.

If you need more assistance in selecting a target rate of return, click Done to return to the main Rate of Return page and choose any of the links under What's your rate of return? at the top.

Your investment income consists of dividends, interest, and capital gains. Dividends and interest are normally subject to taxes in the year they are received. Capital gains are broken into realized and unrealized gains. Realized gains occur when you sell an asset that has appreciated in value. Unrealized gains are increases in the value of the investments you still own. When you sell an investment, you realize a gain and pay taxes on that gain.

If you were to invest solely in stocks that do not pay dividends, your investment income would consist only of capital gains. As a result, in some years your investment income might consist solely of unrealized capital gains and you would owe no taxes on your investment income.

If your portfolio consists of a combination of bonds, dividend-paying stocks, and non-dividend-paying stocks, only a portion of your total investment income may be taxable each year.

Determine what percentage of your investment income comes as deferred gains and adjust your tax rate accordingly. For example, if you generate $1,000 of investment income in a year, and $400 of the income is unrealized gains, you will pay taxes on $600 or 60 percent of your investment income. Set the percentage of income that should be taxed to 60 percent.

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